Is Amazon / Kiva another [Buyer] / [Seller]?

When it comes to corporate hubris and strategic inanity, there is no “beating a dead horse.”  The poor animal simply will not die.

So The Merger Verger offers herewith the prospect of history repeating itself yet again, this time in the large-cap tech sector.  I quote below a series of comments from a business blog discussing the acquisition by a tech giant of a very young company in a field only tangentially related to its core operations.  See if it smells to you the same way it smells to me.

Analysts’ quotes:

  • “With today’s purchase of [Seller], [Buyer] is making its boldest bid yet to remain the most potent force in e-commerce.”

Query: does the definition of the word “bold” inherently imply “smart?” Some analysts wondered:

  • “It’s a marked departure for [Buyer], which to date has acquired only companies directly related to e-commerce.”
  • “It’s also a heckuva lot of money for a nascent business, no matter what the growth and the promise—and one in an entirely new area in which [Buyer] has no experience.”

One tech analyst went so far as to ask:

  • “… why [Buyer] couldn’t have gotten the same benefits much more cheaply and wondered if [Buyer] management might be leaning on their sizable market cap a little too much.”

Eschewing such doubters, Buyer’s CEO offered this tidbit of strategic happyspeak:

  • “Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.”

Each of those quotes – including the one from the CEO – could have been made (and several were made) about the Amazon/Kiva deal.  But they all come from a very different transaction, one that was made in 2005 and then unwound (after a huge write-down) in 2008.  The deal?

eBay’s purchase of Skype.

At the time of the unwind, one analyst remarked:

  • “eBay seems to have bought Skype and set it on auto-pilot (destination: nowhere) almost immediately.”

So all that Meg Whitman said about her acquisition, mirroring as it does what Jeff Bezos has said about Kiva Systems, could perhaps have been realized … if they had integrated the businesses more thoughtfully.  God is in the details (another quote, architect Louis Sullivan, this time.)

I seem to be in quote mode, so I will offer one more, this one from the 18th century philosopher, Georg Wilhelm Friedrich Hegel, who said:

“We learn from history that we do not learn from history.”

To which Karl Marx appended:

 “He forgot to add: the first time as tragedy, the second time as farce.”

The eBay acquisition of Skype was a tragedy, to use Marx’s term. It was one part strategic clunker and three parts integration disaster.  The Merger Verger will watch with interest to see if the Amazon acquisition of Kiva – repeating history – turns into a Marxian farce.

Previous postings on Amazon/Kiva:

Further reading on eBay/Skype:

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Amazon + Kiva: I Think I Finally Get It

I’ve worn a groove in my head from scratching it on last week’s Amazon-Kiva Systems deal.  After reading all the press stating what a crafty move it is and after the huge uptick in Amazon’s (NASDAQ: AMZN) stock price, The Merger Verger feels like the odd man out on this one. [Original posting here]

I still disagree with all the fawning Wall Street analysts and tech-media commentators but I think I have homed in on an explanation.  Let me offer up some facts and then some observations.

Facts:

  1. Jeff Bezos built a spaceship to go to Zebulon or  some place.  (You can look it up.)  The guy clearly has a “boys with toys” problem.  Robots – even ones that look like giant orange throat lozenges skating around a warehouse floor – count as objects of desire. (Earth to Jeff.)
  2. Kiva (founded in 2003) creates leading-edge material handling systems used by an impressive list of customers, including units of Amazon (but not Amazon itself).  It’s privately held but recent revenues were reportedly north of $100 million, making the purchase price of $775 million a bracing 7X multiple of sales. (Yikes.)
  3. Amazon has a long history of successful acquisitions, but all of them of the horizontal type. They have vertical partnerships but their experience in integrating a company whose business fundamentals are entirely different to theirs is basically nil. (Uh-oh.)
  4. The company’s press release about the Kiva acquisition says a big nothing about the rationale behind it and offers only one minor tidbit about the plans for its integration: Kiva’s HQ will remain in Massachusetts.  (Whoopee.)
  5. Equity analysts have settled on the rationale that Kiva robots will bring significant efficiencies to Amazon’s order fulfillment process, which they should.  (At an NPV of minus how much?)
  6. Other analysts have pointed out that the move could be a competitive one, designed to prevent others from having the cost/efficiency advantage associated with the Kiva system, thus enabling Amazon to defend an important advantage. (Come on guys.)
  7. One or two analysts have floated the idea that all those reasons apply but are small beer; the real reason is that Kiva unlocks a door to the next transformational step for Amazon. (Now, ladies and gentlemen, we may be getting somewhere.)

Here’s The Merger Verger’s take on all that:

  1. The absence of any Amazon commentary on the deal’s strategic rationale could be a case of intentional competitive silence but it sure smells like the lack of any meaningful strategy to describe.
  2. On the efficiency explanation, to suggest that the best way to capture the benefit of a key component of your operational infrastructure is to own it outright is just hubris.  By that line of thinking, Amazon should buy a corrugated box manufacturer, UPS should buy a truck maker and Apple should buy, well, China. Metaphorically speaking, there must be some compelling reason to own when you can rent.
  3. As a corollary, one does not pay 7X sales to obtain operational efficiencies; that’s just stupid.  One pays that kind of multiple to launch a sales rocket.
  4. Similarly, to buy a technology company merely to prevent competitors from gaining access to it is a flaccid strategy at best.  Even acknowledging Kiva’s technological superiority, squirreling it away for Amazon’s exclusive internal use merely invites robotics wannabes to fill that void.
  5. Again, one does not pay 7X sales for a company that one intends to prevent others from patronizing. For Amazon to gain an economic return, Kiva must be able to sell its products widely.
  6. So what one DOES pay 7X sales for? One only pays that kind of money to unlock a transformed future.

Amazon is already a world-leading provider of retail fulfillment services, both internally and as a third-party provider for others.  It has the expertise and infrastructure to keep growing this “pick and pack” business.  But Kiva – owning it, not just renting it – could provide the last essential component of the next generation of competitive dominance in the space. By this thesis, the facilities and operational expertise that already exist at Amazon get combined with a future-pathway technology to create a logistics service that is domain leading and defensible. That makes sense to me.

Ironically, if my analysis is right (not just boys-with-toys, not just hubris, not merely operational efficiency, not competitive paranoia) Amazon has some gigantic integration challenges ahead of it.  But I wouldn’t bet against them.

Information on Kiva:

Click here for the company’s website and here for a series of videos showing the system in action. Click here for an amusing robotic interpretation of the Nutcracker Suite entitled “The Dance of the Bots.”

Head Scratcher: Amazon + Kiva = ?

I am scratching my head over Amazon’s (AMZN) announced acquisition of robotics (read: automated logistics) manufacturer, Kiva.  For $775 million!!!

What strikes me initially is the comparison with two other recent news items: UPS’s (UPS) acquisition of TNT (TNTE.AS) and Apple’s (AAPL) decision to apply a fistful of its cash to dividends and stock repurchases.  UPS is using its cash to expand horizontally, expanding its known capabilities into broader markets.  Apple is admitting that it can’t possibly put all of its cash to good use and so is returning some of it to its owners, the shareholders.

Amazon is spending close to a billion dollars on a technology that it knows largely as a user (and a recent one at that).  The Merger Verger is skeptical.

Jeff, you can buy this book online at http://www.amazon.com. Doug

That view is running counter to Wall Street’s.  Amazon’s stock remains up about 5% from the announcement (against a generally flat market since then), resulting in an increase in market cap of nearly $4 billion.  Holy shirt! That’s five times the purchase price.

From an integration perspective (strategic intent, vertical versus horizontal expansion, management know-how and probably due diligence as well) there is a lot to talk about here.  More to come.